SoundHound AI has gotten torched over the last six months - since January 2025, its stock price has dropped 46.7% to $10.75 per share. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy SoundHound AI, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is SoundHound AI Not Exciting?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why we avoid SOUN and a stock we'd rather own.
1. Low Gross Margin Reveals Weak Structural Profitability
For software companies like SoundHound AI, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
SoundHound AI’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 44.1% gross margin over the last year. Said differently, SoundHound AI had to pay a chunky $55.91 to its service providers for every $100 in revenue. 
2. Shrinking Operating Margin
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
Analyzing the trend in its profitability, SoundHound AI’s operating margin decreased by 39 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. SoundHound AI’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 181%.
3. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
SoundHound AI’s demanding reinvestments have drained its resources over the last year, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 104%, meaning it lit $104.49 of cash on fire for every $100 in revenue.
Final Judgment
SoundHound AI isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 27.1× forward price-to-sales (or $10.75 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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